New McKinsey Study Pokes Fatal Holes in Common Trade Myths

Readers of this blog know that one of the themes here has been dismantling pervasive "protectionist myths" that mislead the public into supporting - and thereby empower politicians to implement - anti-trade policies.  Now, a new study from McKinsey, "Trading myths: Addressing misconceptions about trade, jobs, and competitiveness," contributes to this line of attack scholarship.  There are a few things here that I don't totally support (e.g., erroneously labeling an expanding trade deficit a per se "deterioration"), but the whole thing is definitely worth a read.  Some of the myths addressed include the following:

Myth: Mature economies are losing out to emerging markets in trade and thus face increasing trade deficits.

Reality: The trade balance of mature economies has remained largely stable in the aggregate and even begun to improve. There are wide variations between individual countries, but no evidence supports claims of a wholesale deterioration of the trade balance between the mature and emerging economies over the past decade. 

Myth: Manufactured goods drive deteriorating [SL: sorry, I couldn't resist] trade deficits.

Reality: Imports of primary resources, whose prices have been rising sharply, are the largest negative contributor to the trade balance of mature economies. In 2008, mature economies ran a 3.3 percent of GDP trade deficit in primary resources but a 0.5 percent of GDP surplus in manufactured goods and specifically a 1.6 percent surplus in knowledge-intensive manufacturing. Some individual mature countries run trade deficits in knowledge-intensive manufacturing.

Myth: Trade is at the heart of the loss of manufacturing jobs.

Reality: Changes in the composition of demand and ongoing productivity increases are the main reasons for the decline in the number of such jobs in mature economies. The share of manufacturing in these countries’ total employment is bound to decline further, from 12 percent today to less than 10 percent in 2030, according to our analysis. MGI finds that trade or offshoring are responsible for the loss of around 20 percent of the 5.8 million US manufacturing jobs eliminated between 2000 and 2010.

The authors also hit on several other myths in the report, such as:

Myth: Mature economies create jobs only in low-paid, low‑value domestic services

Myth: Service trade is small, and emerging economies with low‑cost talent will capture any increase

Myth: “Service economies” such as the United States are the world leaders in service trade

After dispatching all of these myths, the authors make several policy suggestions that also should sound familiar to this blog's readership:

- Resist protectionist pressures.

- See emerging economies as an opportunity, not a threat. 

- Push vigorously for the fuller liberalization of trade in services, where restrictions remain high.

- Gear trade-related policy toward supporting—and benefiting from—comparative advantage in attractive stages of global value chains (like R&D and design), and avoid any emphasis on sustaining or creating direct employment through manufacturing exports.

- Improve measurements of global value chains and services trade.

I, unsurprisingly, think that if the federal government implemented these policy solutions, US businesses and workers would be much, much better positioned to dominate the 21st century global economy.  (And I've been screaming it from the rooftops for a few years now.)

Now, if only a few of our political leaders - from either party - would listen.

(h/t ToGetRichIsGlorious)

New Podcast: Russia, the United States and the WTO

The good folks at Coffee and Markets had me on their show today to talk about Russia's WTO accession, the related US congressional vote on Permanent Normal Trade Relations (PNTR), and broader US efforts (or lack thereof) at the WTO.  The podcast is available to listen or download here or here.

Enjoy!

Government Woefully Unprepared for Market Innovation, Part 7491

I've discussed "3D printing" before, but a new must-read article from The Economist explains just how the new technology is causing a "Third Industrial Revolution."  The whole article is worth reading, but I was particularly struck by this discussion of the revolutionary technology's immense impact on national policy:

Consumers will have little difficulty adapting to the new age of better products, swiftly delivered. Governments, however, may find it harder. Their instinct is to protect industries and companies that already exist, not the upstarts that would destroy them. They shower old factories with subsidies and bully bosses who want to move production abroad. They spend billions backing the new technologies which they, in their wisdom, think will prevail. And they cling to a romantic belief that manufacturing is superior to services, let alone finance.

None of this makes sense. The lines between manufacturing and services are blurring. Rolls-Royce no longer sells jet engines; it sells the hours that each engine is actually thrusting an aeroplane through the sky. Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries.

This all should scare the bejeebus out of those of us who advocate national trade and economic policies which reflect modern realities of today's markets.  Why?  Because our policymakers still haven't accepted obvious market phenomena that have been around for a decade or more, and thus develop and advocate archaic policies that actually serve to hurt domestic industries, workers and the economy more broadly.  For example, almost all US politicians - in both major parties - still kvetch about the US-China trade balance, even though study after study has demonstrated just how pointless that statistic has become in this era of global supply chains.  The latest example of that fact comes from this great new graphic (h/t ToGetRichIsGlorious) which shows the cost and profit breakdown of the iPad in 2010:

As you can see, of the of the $499 retail price, Apple (30.1%) and other US companies (2.4%) get 32.5 percent of the profits, while China gets only a tiny fraction of that (1.6%).  Yet 100% of the iPad's US customs value adds to the US-China trade deficit.  So why on earth do our politicians act like this bilateral deficit - or any bilateral trade deficit for that matter - should form the basis for US-China trade policy?  It's simply mind-boggling.

Another common example of the gaping market-politics disconnect that I've frequently lamented - and one hinted by the story above - is our politicians' continued fetishization of manufacturing (and manufacturing employment).  It warms my heart that a few politicians appear to be getting the message about services, as this recent and (mostly) refreshing op-ed from US Trade Representative Ron Kirk demonstrates:

The United States today is a services trading powerhouse, and it's vital that we build on our already robust services surplus with dynamic new opportunities...

Next month, the U.S. will host the 12th round of negotiations in the Trans-Pacific Partnership. Those critical talks will follow closely on the heels of a number of key engagements with America's global trading partners, including last week's Summit of the Americas, this week's meetings of the G-20 trade ministers, and May's Strategic and Economic Dialogue with China. In June, the trade ministers of the Asia-Pacific Economic Cooperation forum (APEC) will meet in Russia.

In all of these fora, the U.S. will be seeking new avenues for American businesses to sell more of their products around the world, and to hire more workers in the services sector, which already accounts for four out of five American jobs.

The U.S. is the largest services trading country in the world, with $1 trillion in two-way trade in 2011 and a services trade surplus last year of $179 billion (up 23% from 2010). In what economist Bradford Jensen defines as the fastest-growing services sectors, Bureau of Economic Analysis data show that the U.S. in 2010 had a trade surplus of $57 billion with the Asia-Pacific region, of $44 billion with the European Union, of $35 billion with the countries covered by the North American Free Trade Agreement (Canada and Mexico), and of $25 billion with the rest of Latin America....

If some of those data sound familiar, they should - they mirror several of the points that I made in December about America's globally-dominant services sector (and politicians' ignorance thereof).  The aforementioned op-ed goes on to explain some of the (mostly good) things that USTR is doing to further expand US service suppliers' access to foreign markets, but unfortunately, Kirk's boss doesn't seem to share the love for the US service sector.  Instead, most of President Obama's tax and trade policies are geared toward boosting the US manufacturing sector (at the services sector's expense, naturally) - a troubling disconnect that I've noted repeatedly.  So while USTR Kirk's services affinity is certainly a welcome development, it's a bit less exciting when one considers the archaic and misguided policies pushed by the rest of his colleagues in the Obama administration.

And this gets me back to 3D printing and the "Third Industrial Revolution."  If our very "modern" and "progressive" government (and other governments like it) still refuses to recognize and adapt to simple and obvious market developments that have been going on for decades now, what hope does it have in recognizing and adapting to the more complicated and revolutionary things that are happening right now?

If the trade-related examples above are any indication, the answer to that question is as depressing as it is obvious.  That answer also should inform our faith in government policy accepting and adapting to other critical market phenomena too.  Maybe, just maybe, highly complex things like industrial policy or nationalized healthcare aren't very good ideas after all, huh?

Crazy thought, I know.

"Export-Oriented America"

GMU's Tyler Cowen has a new article in the American Interest that explores a lot of the issues that I've been covering here for the last few years.  Cowen first provides three reasons to think that the United States could become an export powerhouse in the next few years (hint: none of them involve China's currency or President Obama's National Export Initiative):

First, artificial intelligence and computing power are the future, or even the present, for much of manufacturing.... Factory floors these days are nearly empty of people because software-driven machines are doing most of the work....

The more the world relies on smart machines, the more domestic wage rates become irrelevant for export prowess. That will help the wealthier countries, most of all America. This logic works on both sides. America is using less labor in manufacturing, but China is too, even as its manufacturing output is rising. The fact that Chinese manufacturing employment is falling along with ours means that both our higher wages and their lower wages are becoming less relevant for the location of manufacturing decisions. The less manufacturing has to do with labor costs and relative wage levels, the greater the comparative advantage of the United States....

The second force behind export growth will be the recent discoveries of very large shale oil and natural gas deposits in the United States. Come 2030, the United States may well be the new Saudi Arabia of energy markets. We have new fossil fuel discoveries to draw upon, enough to fuel this country for decades, and there is plenty of foreign demand for those resources....

[T]he third reason why America is likely to return as a dominant export power: demand from the rapidly developing countries, and not just or even mainly demand for fossil fuel. As the developing world becomes wealthier, demand for American exports will grow. (Mexico, which is already geared to a U.S.-dominated global economy, is likely to be another big winner, but that is a story for another day.)

In the early stages of growth in developing nations, importers buy timber, copper, nickel and resources linked to construction and infrastructure development. Those have not been U.S. export specialties, and so a lot of the gains from these countries’ growth so far have gone to Canada, Australia and Chile. Usually American outputs are geared toward wealthier consumers and higher-quality outputs, which is what you would expect from the world’s wealthiest and most technologically advanced home market. To put it simply, the closer other nations come to our economic level, the more they will want to buy our stuff. Indeed most of those nations are growing rapidly, so we can expect their attentions to shift toward American exporters. The leading categories of American exports today—civilian aircraft, semiconductors, cars, pharmaceuticals, machinery and equipment, automobile accessories, and entertainment—are going to be in the sweet spot of growing demand in what we now call the developing world....

Just as Canada and Australia have prospered over the past ten years because their specialties matched Chinese demands, the United States is likely to be the bigger winner in the next ten years as Chinese (and other) demands mature. It’s a trend that has clearly already begun. In 2010, for instance, American exports to China rose by 32 percent, according to a 2011 report by the U.S.-China Business Council. Furthermore, American companies, with their practicality and marketing expertise, will be well positioned to convert scientific innovations from Chinese labs into new commercial products once such innovations start to arrive in large numbers.

So far, so good. Cowen goes on to explain that America's new export strength "will resurrect the United States as a dominant global economic power," helping to resolve the United States budget, trade and diplomatic problems.  I especially like Cowen's optimism that "[t]he opposition to free trade as it existed during the 1980s, and which led even Ronald Reagan into auto protectionism, is almost gone, and these pro-export developments mean that it won’t come back anytime soon."  I wonder, however, whether this new US support for free trade could be undermined as US exports are increasingly subject to trade remedies actions in key foreign markets like China - ironic, considering that the United States has always been one of the biggest users (and defenders) of trade remedies to curb foreign imports.  On the other hand, maybe it will result in a significant change in US trade remedies policies in forums like the WTO, seeking to impose, rather than rebuff, more stringent disciplines on nations' application of trade remedies measures.

That interesting hypothetical aside, Cowen goes on to explain the big downside to the United States big export surge:

The new export-based prosperity may not translate into higher wages for everyone, or even most people, in the United States. Skilled laborers who work with smart machines or even hold advanced managerial jobs will continue to make big gains, as the numbers have been showing for some time. Capital will do well too, especially if it is geared toward export success.... [S]ignificant segments of the American workforce are likely to continue suffering falling real wages, even in a time of rising export prowess.

As the number of American jobs in manufacturing has fallen dramatically, it is often forgotten that American manufacturing output has continued to rise, even during some slow times. In the past decade, the flow of goods coming from U.S. factories has gone up by a third as capital has increasingly become a greater share of input over labor....

[W]e’ll probably see a lot of the American workforce accept lower wages. A lot of American exporters are already experimenting with a two-tiered wage structure, with significantly lower wages for incoming workers....

To some extent, these trends resonate with the old saying, “Live by the sword, die by the sword.” Jobs in the export sector face intense competition, precisely because U.S. companies are increasingly selling into a global market, and that means wages in this sector cannot be guaranteed to rise. They might, and they might not, depending on how creative, efficient and well managed we are. Services, in contrast, are often produced inefficiently, but the jobs are more extensively cocooned within a protected domestic market, often based on government privileges and market-distorting third-party payment schemes.

Although I agree (and have argued for a long while now) that US manufacturing exports are not some magic bullet for the US labor market, I'm inclined to quibble a bit with Cowen's repeated characterization of the US services sector as "cocooned within a protected domestic market."  While that's certainly true for government jobs and certain health care and education jobs, it's definitely not the case for an increasing number of services jobs - for example in medicine, engineering, IT and, yes, even law (trust me) - that totally dominate in the face of real and growing global competition (precisely because US services providers are much more "creative, efficient and well managed" than their global counterparts).  Cowen seems to imply later (see below) that a such a dynamic services sector is to be expected in the coming years; I'd argue that, in this respect, the future is indeed now (and it's not nearly as dystopian as Cowen makes it out to be).

Nevertheless, Cowen next explains that even his overly-bad news comes with a silver lining:

There is the prospect of a better career path, accompanying future export gains, that stands a chance of making life less grim for the working class. Some of the new technological and export-related breakthroughs will consist of making education and health care more affordable, often through software and smart machines that bypass the current credentialized control of those fields. Imagine getting an online medical diagnosis from a smart machine like IBM’s Watson, or learning mathematics from an online MITx program or one of its successors. The American poor and lower middle class will have considerably greater opportunities, at least if they are savvy with information technology and disciplined enough to take advantage of these new free or cheaper goods. Of course, this will not come close to helping everybody. These internet tools reward the self-motivated, who will be disproportionately well educated, even if their parents lack higher education, wealth and connections. Many of the rest will still fall by the wayside.

Even American earners who must cope with stagnant wages will probably reap big gains from new opportunities to lower their basic living expenses. Imagine a family earning $37,000 per year that has much cheaper education and health care costs, thanks to government benefits and internet-based innovation. No one will be tempted to call such households wealthy, but they won’t fit the standard measure of poverty either. They will have positive experiences in their lives and lots of free and nearly free goods....

The internet will continue to make it easier for small businesses to export, but many of the growth areas, including fossil fuels, heavy equipment and cars and other high-tech items will remain the province of big business. America will likely see a new age of corporate titans selling their products and services to the entire world, and the world as a whole will be far wealthier than in times past. The wealthiest American earners will be very wealthy indeed, even by current standards. Due to their export activities, they will take an increasingly global perspective, and they will give away lots of their money, just as Bill Gates has expanded his philanthropy abroad.

Cowen concludes by predicting that the growing divide between the hyper-productive and over-protected will grow to dominate our society and our politics:

These days, this old portrait of the two-tiered economy, originally applicable to a developing economy, may be re-emerging for the United States. We had not thought through seriously enough the possibility that the world’s most technologically advanced economy would, over time, develop persistent and indeed growing productivity differentials across sectors. It clearly has, and the social and political frictions this has caused now dominate our politics—or soon will.

One way to understand this is to note a neglected implication of Moore’s Law for computer processing speed, namely that its use in the value-added process benefits some economic sectors much more than others. In this case the static sector consists of the protected services (a big chunk of health care, education and government jobs), and the dynamic sector is heavily represented in U.S. exports, often consisting of goods and services rooted in tech, connected to tech, or made much more productive by tech innovations. Piece by piece, bit by bit, we Americans are replicating the two-tiered developing economy model, albeit from a much higher base level of wealth and productivity.

A battle between the "static sector" (e.g., public sector and industrial unions) and the "dynamic sector" (e.g., industrialists, non-union workers and professional services)?  Is this really, as Cowen contends, the distant future of American politics?

Or is "the future" right now?

Manufacturing Jobs Won't Save Labor Market Says... US Labor Department?

Reuters published a great analysis last week of the future of the US labor market, and the report's main conclusion shouldn't surprise anyone who's followed this blog for a while: the US manufacturing sector will experience a renaissance of sorts and may even see a near-term uptick in jobs, but longstanding, systemic factors - mainly continuing improvements in productivity - will prevent manufacturing jobs from keying a long-term recovery in the struggling US labor market.  What is surprising, however, is that the latest data come from President Obama's own Department of Labor:

U.S. manufacturers are hiring at the fastest pace in more than a decade to keep up with new orders but sweeping technological advances could cost thousands of factory workers their jobs in years to come.... 

Last year, factories added 237,000 jobs - the most since 1997 - and that burst in hiring is seen stretching into this year as the economy recovers from the 2007-09 recession. 

But a renaissance for industrial employment is unlikely. Over the long term, factory job creation looks destined to stagnate as technology advances, and manufacturers' role in the labor market will likely continue a decades-long decline. 

A Labor Department report published on February 1 projected factory employment will drop to 11.5 million workers by 2020 - down from 11.9 million in January - despite expectations production will increase in coming years....  

Even though the United States remains a pre-eminent manufacturing power, accounting for about a fifth of global factory output, only 9 percent of its workforce is engaged in factory activity, and that percentage is falling. Manufacturers' share of the labor market will likely drop to 7 percent by the end of the decade, according to the government projections, down from nearly a third in the 1950s when unskilled workers played a bigger role....

The Labor Department's new report is available here.  Almost all of the topline conclusions are important, but here are a few of the most telling:

• The health care and social assistance sector is projected to gain the most jobs (5.6 million), followed by professional and business services (3.8 million), and construction (1.8 million).

• About 5.0 million new jobs--25 percent of all new jobs--are expected in the three detailed industries projected to add the most jobs: construction, retail trade, and offices of health practitioners. Seven of the 20 industries gaining the most jobs are in the health care and social assistance sector, and five are in the professional and business services sector.

• The 20 detailed industries projected to lose the largest numbers of jobs are primarily in the manufacturing sector (11 industries) and the federal government (3 industries).

• Of the 22 major occupational groups, employment in healthcare support occupations is expected to grow most rapidly (34.5 percent), followed by personal care and services occupations (26.8 percent), and healthcare practitioners and technical occupations (25.9 percent). However, the office and administrative support occupations group, with projected slower than average growth of 10.3 percent, is expected to add the largest number of new jobs (2.3 million).

• One-third of the projected fastest growing occupations are related to health care, reflecting expected increases in demand as the population ages and the health care and social assistance industry grows.

• Occupations that typically need some type of postsecondary education for entry are projected to grow the fastest during the 2010-20 decade. Occupations classified as needing a master’s degree are projected to grow by 21.7 percent, followed by doctoral or professional degree occupations at 19.9 percent, and associate’s degree occupations at 18.0 percent.

• Of the 30 detailed occupations projected to have the fastest employment growth, 17 typically need some type of postsecondary education for entry into the occupation.

• Two-thirds of the 30 occupations projected to have the largest number of new jobs typically require less than a postsecondary education, no related work experience, and short- or moderate-term on- the-job training.

• Only 3 of the 30 detailed occupations projected to have the largest employment declines are classified as needing postsecondary education for entry.

So what do these numbers tell us?  Well, first and most obviously, manufacturing employment will continue its decades-long decline in the United States, particularly as a share of GDP.  Of course, as I've repeatedly mentioned, the long-term decline is not just an "American" phenomenon - it's happening pretty much everywhere in the world:

And before you ask, yes, it's also happening in China.  For example, Chinese manufacturing giant Foxconn announced recently that it plans to replace 500,000 workers with robots over the next few years.  And it's certainly not alone.

However, the outlook for US manufacturing in every area other than employment is quite good.  Reuters notes that the United States will continue to be a global manufacturing powerhouse, and, interestingly, we have China (in part) to thank for that:

[A]nalysts say much of the recent hiring spurt is just a temporary rebound from the recession, when manufacturing output fell about 20 percent and factories laid off 2 million people. Still, there are factors supporting the sector.... 

After a decade of heightened competition with China, which devastated American industries like clothing makers, the U.S. factories that remain are more high-tech and less likely to be undercut on labor costs. 

Moreover, wages in China are rising much faster than in the United States, reducing the incentive to offshore production, while the recession itself raised pressure on U.S. companies to embrace more cost-saving measures, like automation. 

S & S Hinge Company, for example, has retooled its plant in Bloomingdale, Illinois, since the recession. A pair of computers runs its newest production line, which makes hinges 50 percent faster than older lines. That is helping the firm meet rising orders for parts that go into pickup truck toolboxes while reducing the need for more staff. 

"We've upgraded our factory. We actually put in a new operating system. So it has cut the need for more bodies," said Richard Sade, the company's chief operating officer.

Fascinating stuff.

Second, the Labor Department report shows just how helpful a good education will be for finding and keeping a job in the 21st century American labor market.  Most of the fastest growing job sectors require post-secondary education, while almost none of the shrinking sectors do.  However, all is not lost for less-educated Americans, as the numbers make clear that there will still be plenty of jobs out there for them too (although not in manufacturing, it seems).

And that brings me to the third big takeaway from the DoL report: clearly the most promising sectors for jobs in America are almost all in services, especially health care.  Again, this is not surprising.  Services' share of the US labor force and GDP has been climbing for years now, and it's where the United States is globally dominant.  Reuters again:

As grim as that sounds for many workers, a future with fewer factory jobs isn't necessarily bad for the economy. 

Part of the drive to be more efficient has led factories to outsource more work, contracting services from accounting firms, consultancies and other companies.

Even though the number of workers in U.S. factories today is roughly the same as 70 years ago, jobs in business services, a sector that includes many people working indirectly for manufacturers, have grown eight-fold. The Labor Department expects business services will be one of the top job-creating industries in coming years.

As I noted a couple months ago, the often-maligned services sector has plenty of room for growth and produces tons of high-paying, globally-competitive jobs.

But it's this obvious fact that has me calling the Labor Department report "surprising."  President Obama has spent the last few months touring the US factories and touting a labor market recovery based seemingly on only American manufacturing.  And his budget and tax proposals are all biased in favor of manufacturing (and thus inherently biased against services).  This makes absolutely no sense, as Reuters politely notes:

[The services boom] makes plans by Obama to give manufacturers special treatment - or to penalize them for offshoring jobs - wrongheaded, says Jagdish Bhagwati, an economist at Columbia University.

Obama last week proposed new tax breaks for manufacturers, but many economists view the decline in factory employment as a normal part of the economy's development.

Very normal... and happening here in the United States for a very long time now.  So long that even the US Department of Labor has caught on.

So when it comes to fixing the American jobs market, maybe the President should - and I can't believe I'm about to say this- chat more with the Labor Department and less with his political staff next time.

(Okay, stop laughing.)

New Podcast re: Corporate Taxes & Manufacturing

The good folks at Coffee & Markets invited me and ATR's Ryan Ellis on their show today to discuss GOP Presidential Candidate Rick Santorum's tax plan and, more broadly, corporate taxes, US manufacturing and global competitiveness.  The podcast is available here for your listening pleasure.

For those of you who have been reading this blog for a while, much of what I said on the podcast will sound familiar.  For the rest of you, I recommend the following homeworkbackground reading:

US Politicians' Unfortunate Ignorance of Global Services Trade

Greasing America's Competitiveness Slide

GOP Candidates Push the Manufacturing Myth

Happy listening!

Europe's "Green Airline War" Provides a Glimpse Into a WTO-less World

The EU's implementation of new regulations imposing a tax on airlines based on their carbon emissions has resulted in a firestorm of litigation and international teeth-gnashing.  The EU's steadfast commitment to assess the tax also has led many to speculate that the system could set off a "trade war" among nations as they impose similar retaliatory fees on EU-based airlines that enter their airspace.  The whole thing is a giant mess that could end up costing airlines and, inevitably, consumers billions of dollars and crippling the already-struggling global airline industry, but it does have one - albeit small - silver lining: it demonstrates just how dangerous the world might be without the WTO.

As you may recall, the demise of the WTO's Doha Round of multilateral trade negotiations has led many people to speculate that the global trade body has become pointless and/or impotent.  I've long disagreed with such commentary, arguing that, while the WTO may have its struggles as a negotiating body, its existing rules and dispute settlement mechanism are vital for maintaining an open trading system and thereby preventing the collapse of the global economy.  I'm certainly not alone in such a defense, and the EU airline fiasco shows just how right we WTO-defenders are.  But before we get to all that back-slapping, first let's check in on the EU "green airline war" as per the good folks at the WSJ:

Europe's anticarbon crusade failed to extend the Kyoto Protocol this month, but the boys in Brussels don't give up easily. Now Europe may kick off a trade war with its new scheme to tax airlines on carbon emissions.

The rule, which goes into effect January 1, will apply to all airlines regardless of nationality and to all flights to or from Europe. Airlines that refuse will be subject to fines of €100 per ton of CO2 that exceeds the EU's limits, and they could be banned from operating in Europe.

The International Air Transport Association estimates the rule will cost €900 million next year and at least €2.8 billion annually by 2020. That's a lot for an industry that expects to turn a combined global profit of €3.5 billion next year. The EU admits the scheme will raise ticket prices and dampen consumer demand, which may be the point: To make carbon-spewing international travel accessible to fewer people.

In September the U.S. joined Brazil, India, China, Russia and 21 other governments in declaring that "the unilaterally imposed [European] measures were inconsistent with international legal regimes." The 1944 Chicago convention on aviation gives every signatory "complete and exclusive sovereignty over airspace above its territory."

Brussels shrugged that off, and last week the European Court of Justice rejected a challenge brought by American and Canadian airlines. The ruling included the logical gem that while all EU nations ratified the 1944 convention, the EU itself did not exist at the time and thus cannot be bound by its provisions.

The European rule does allow exemptions for airlines whose governments are taking "equivalent measures" to penalize carbon emissions, though airline sources say a patchwork of carbon-reporting and taxation schemes would be even more unpalatable than the EU's blanket measure.

Meanwhile, the EU's trading partners are threatening to retaliate. Beijing has floated a cut in Chinese airlines' Airbus orders, and Chinese carriers are launching their own lawsuit. New Delhi is mulling a payback tax, and Moscow hasn't ruled out increasing overflight fees on European carriers.

The U.S. has stated its "strong legal and policy objections" to the move, and this month Secretary of State Hillary Clinton and Transportation Secretary Ray LaHood warned that Washington "will be compelled to take appropriate action" if the EU doesn't back down. The measures could include a tax on European airlines, judging by the request the U.S. made this month to nine European carriers for information on their 2012 carbon allowances and 2010 revenues.

So how, exactly, does this mess shine any light on the WTO's value?  Well, because the airline services regulated by the EU anti-carbon tax are most likely exempt from WTO rules, that's why.  Typically, those rules would require WTO Members (with certain exceptions) to treat each others' services in a non-discriminatory manner, and these non-discrimination disciplines, when applied to goods, are one of the reasons why WTO Members like the EU and United States haven't imposed "carbon tariffs" on each others' imports - something I've discussed a lot here.  The WTO's General Agreement on Trade in Services (GATS), however, contains an "Annex on Air Transport Services" which expressly exempts “measures affecting trade in air transport services, whether scheduled or non-scheduled, and ancillary services” from GATS disciplines.  The Annex states that the GATS will not apply to (i) traffic rights or (ii) services directly related to the exercise of traffic rights, except for aircraft repair and maintenance services, with very limited exceptions.  A “traffic right” is broadly defined in the Annex and basically covers every type of remunerative air transport (passenger, cargo and mail).  Thus, because the EU carbon tax regulates airlines’ exercise of "traffic rights," it's very likely exempt from the GATS.

Moreover, the Directive is also likely exempt from the WTO Agreement on Technical Barriers to Trade (TBT) because services are expressly excluded from that Agreement (Annex I).  So, under WTO rules, it appears that the EU can basically do whatever it wants with respect to taxing and regulating airline services that occur in its airspace.  And when it does, other WTO Members can retaliate in the same or similar fashion.  This explains why (a) no WTO Members have challenged the EU directive at the WTO; (b) why US and other airline carriers were forced to go to the EU courts to challenge the directive (yeah, good luck with all that); (c) why the EU has basically ignored nations' vocal complaints; and (d) why other nations are threatening to impose their own airline taxes to spite the EU (or to maybe qualify for an exemption from the tax).

In short, it's the Wild West out there, and airline consumers (and global trade) will inevitably be the casualties of any shoot-out.

A couple years ago, I stated that, even without Doha, the WTO remained indispensable because "(i) WTO rules establish a baseline of global trade liberalization, (ii) nations pursue "WTO plus" commitments through unilateral liberalization (best route) or bilateral/regional trade agreements with other willing partners (meh route), and (iii) many large trade disputes are adjudicated through the WTO's dispute settlement body."  These disciplines help thus nations avoid tit-for-tat protectionism that can, in the rules' absence, devolve into a real global trade war.

The EU's "green airline war" shows us just how right this is, and just how nasty a WTO-less world could be.

UPDATE:  Right on cue, Chinese airlines are saying that they'll refuse to pay the new EU carbon tax.  Yeah, that should go swimmingly.  Meanwhile, "other Asia Pacific carriers, already battling a weak travel market, are likely to pass on the extra cost to passengers."  Awesome.

US Politicians' Unfortunate Ignorance of Global Services Trade

The US manufacturing sector has long been a focus of many statewide and national political campaigns, as well as elected officials' trade and fiscal policies.  As I noted a few months ago, many campaigning politicians' obsession with the American manufacturing sector - particularly their belief that it's in desperate need of government support - is completely wrongheaded.  But even if it were true that US manufacturers are struggling mightily in today's global economy, that still wouldn't explain why, particularly when it comes to trade, our politicians don't also obsess over US services and foreign barriers to them.

In fact, for many campaigning pols and elected officials, it's as if the services sector doesn't even exist.  For example, GOP presidential candidate Rick Santorum's fiscal plan involves massive tax cut and other subsidies for domestic manufacturers, but doesn't once mention the services sector.  And, as I've lamented repeatedly on this blog, US and other negotiators in the WTO's Doha round prioritized agriculture and industrial market access, while services liberalization was an afterthought to be negotiated only after modalities in the "important" sectors were resolved.

This obsession might make sense for politicians and trade negotiators in certain developing economies, but it's a huge mistake for their US counterparts.  A cool new book from Georgetown's J. Bradford Jensen entitled Global Trade in Services: Fear, Facts, and Offshoring makes this point clear, showing that the US services sector is globally dominant and that global trade in services provides far more and better opportunities for assisting the American economy's resurgence.  It also demonstrates that fears about outsourcing in the services sector are totally overstated.  I recently attended a presentation by Jensen on his book, and he was kind enough to share some of those materials with me.

Key findings from the book include:

• The service sector is a large and growing contributor to the US economy, employing a majority of American workers. The business service sector (which includes, among many others, information, financial, scientific, and managerial services) alone accounts for 25 percent of employment in the United States—more than twice as many jobs as the manufacturing sector. Employment in the business service sector increased almost 30 percent over the past decade, while manufacturing employment decreased by over 20 percent.

• The popular perception that most service jobs are “bad jobs with low wages” is wrong. In fact, the business service sector pays significantly higher wages and salaries on average than the manufacturing sector. Average annual wages in business services are more than 22 percent higher than average wages in manufacturing.

• Trade in services is growing, both imports and exports, and the share of employment in tradable services activities is large, potentially exposing a large share of the US workforce to foreign competition. Service exports have expanded dramatically over the past decade, doubling over the past decade. And although service imports have also increased significantly over the same period, the United States consistently runs a trade surplus in services—in contrast to its sizable trade deficit in goods.

• Many service activities—engineering and architecture services, project management services, movie and music recording production, software production, and research and development services, to cite a few examples—appear to be “traded” within the United States and thus are at least potentially tradable internationally. Approximately 14 percent of the US workforce is in service industries that this book classifies as tradable. In contrast, only about 10 percent of the workforce is in the entire manufacturing sector. When workers in tradable occupations (such as computer programmers in the banking industry, or medical transcriptionists in the health care industry) within nontradable industries are included, the share of the workforce in tradable service activities is even higher.

• Even though these jobs pay high wages, they are not likely to be lost to low-wage countries. Indeed, precisely because they are high-skill, high-wage jobs, they are jobs that the United States is likely to retain and that can support exports. The United States has comparative advantage in high-skill, high-wage manufacturing activities.

• The United States has comparative advantage in services and has been successful in exporting services. Indeed, the nation consistently runs a trade surplus in services. But US service firms’ participation in the international economy lags that of US manufacturing firms: a far smaller share of service output than of manufacturing output is traded. Thus, there seems to be considerable opportunity for US firms and workers from increased service trade.

The implications of Jensen's findings are clear:

Although the United States has comparative advantage in services, turning that advantage into real economic benefits for US firms and workers is not automatic. A number of large and fast-growing economies around the world are less open to service trade than the United States. Liberalizing service trade with these countries is sure to be difficult, because it means not just reducing tariffs and other border controls as was the case with trade in manufactures, but instead fighting through a tangle of regulations, licensing requirements, and other barriers well within countries’ borders. But the historic opportunity that increased service trade represents, in particular because of the coming infrastructure boom—over $20 trillion by some estimates—in the developing world, well justifies the effort required. Other developed economies also have comparative advantage in services and would be natural partners with the United States in persuading the large, fast-growing countries with high service barriers to liberalize.

Based on his findings, Jensen makes several good, basic recommendations for US trade policy:

The United States, working through the General Agreement on Trade in Services (GATS), should join with other developed countries in pushing for further liberalization of business services, to ensure that US service firms and workers have the opportunity to compete in the coming infrastructure boom.

The United States, again in cooperation with other developed countries, should strongly encourage large and fast-growing countries to sign on to the WTO government procurement agreement.

The United States should make access to a good primary, secondary, and postsecondary education a high national priority.

He then concludes that "the United States should embrace trade in services and pursue liberalization in the services sector aggressively. Both the United States and the world have much to gain and little to lose."

But, hey, maybe you refuse to take the statements above at face value and instead remain committed to our politicians' manufacturing obsession.  Well, fortunately for you, Jensen sent me several great graphics from his presentation, and I've uploaded them here.  Below are a few of my favorites.

First, the importance - in terms of size and earnings - of services to the US economy:

Next, proof that the United States' comparative advantages lie in high-end manufacturing and, you guessed it, services:

Next, the immense advantages of tradable services in terms of earnings, education and quantity:

Finally, a review of just how high are global barriers to trade in services and the most-restrictive countries:

And yet our political class obsesses over manufacturing and constantly frets about global impediments to American goods exports.  Utterly nonsensical, wouldn't you say?

New ITC Report: Investment Abroad by US Services Firms Supports 700k US Jobs (UPDATED)

From the non-partisan US International Trade Commission comes further proof that political promises to "end tax breaks for companies that ship jobs overseas" are utterly nonsensical and potentially destructive:

This working paper examines the effect that U.S. services firms’ establishment abroad has on domestic employment. Whereas many papers have explored the employment effects of foreign direct investment in manufacturing, few have explored the effects of services investment.  We find that services multinationals’ activities abroad increase U.S. employment by promoting intrafirm exports from parent firms to their foreign affiliates.  These exports support jobs at the parents’ headquarters and throughout their U.S. supply chains. Our findings are principally based on economic research and econometric analysis performed by Commission staff, services trade and investment data published by the Bureau of Economic Analysis, and employment data collected by the Bureau of Labor Statistics. In the aggregate, we find that services activities abroad support nearly 700,000 U.S. jobs. Case studies of U.S. multinationals in the banking, computer, logistics, and retail industries provide the global dimensions of U.S. MNC operations and identify domestic employment effects associated with foreign affiliate activity in each industry.

Those gosh-darn outsourcers and their totally-helpful economic activity!

UPDATE:  A friend emails with the following anecdote:

Couldn't agree more. Before returning to the States as an adult, I helped an Indian BPO offshore [a Fortune 500 Retailer's] English- and Spanish-language customer contact solutions from Texas to Guatemala. Not only did the customer service quality improve (for USD 12/hour in San Antonio, TX, [the Company] could only higher monoligual ex-drug addicts and parollees to answer the phones but, for USD 5/hour in Guatemala City, we could hire bilingual college grads, many of them with enginerring degrees) but Sears also expressed to us that, had it not been for the cost savings of moving to Central America, it would have likely sold off its home repair service line of business (thus leading to a massive lay off of thousands of repair technicians). While it is unclear whether those technicians would have found work with third-party service providers or not, the offshoring we did helped save that industry from an even more precipitous decline and/or painful structural changes.


The math was as such:


A few call center operators lost their job in TX = thousands of repair technicians held onto their jobs (and [Retailer] conserved one of its oldest and most trusted lines of business which is home repair service).

Supporters of TAA Expansion Need to Find Another Myth

As I noted last week, the White House has refused to submit implementing legislation on pending FTAs with Colombia, Panama and South Korea until House Republicans agree to extend now-expired provisions of the Trade Adjustment Assistance program.  These provisions, included in the 2009 Stimulus* Bill, dramatically expanded the scope and coverage (and expense!) of the TAA program to include, among other things, services workers whose jobs were allegedly lost because of trade.  Here's how Sen. Debbie Stabenow (D-MI) - of the loudest proponents of the TAA expansion - described the provisions back in February:

In 2009, an update to TAA was enacted to help the program reflect the realities of today's global economy. Created in 1974, TAA originally did not allow service workers to take part in the program, and only those whose jobs were shipped to a country with which the United States has a free trade agreement qualified-in other words, workers whose jobs were sent to China and India were turned away. The 2009 update allowed service workers and those whose jobs were offshored to any country to apply.

Today Sen. Stabenow and some of her Senate colleagues repeated this refrain as they announced their support for the White House's latest FTA extortion demands.  But does their call for expanded TAA coverage to protect American services workers from outsourcing to India, China and elsewhere actually jibe with the global economic "realities" about which the Senators allegedly care so dearly?

In short, no.  Not at all.

As I recently noted, politicians' breathless claims about the rampant outsourcing of American services (and manufacturing) jobs to places like India and China are far more myth than reality.  Indeed, the United States actually ran a trade surplus in services with China (and many other countries) in 2010 and has been a net "insourcer" overall for several years now:

The US ran a relatively tiny services deficit with India in 2010 and a small surplus in 2009, but today comes eye-opening news that Indian corporations might be turning even more often to the US workforce:

[I]n a reversal of fortunes it now appears that large Indian companies are actually now themselves outsourcing - to U.S. shores.

Large corporations that have boomed in India amid the country's nimble economy have been drawn to the U.S. where unemployment has soared....

Experts said that the phenomenon, which could become more widespread in the coming years, is partly due to Indian workers demanding higher wages and higher living standards.

'The U.S. became the fastest-growing location for us last year. We expect that to continue this year,' Genpact chief executive V.N. 'Tiger' Tyagarajan said.

Joseph Vafi, an analyst at Jefferies & Co. in San Francisco told the Washington Post: 'What you have going on in India are salary hikes. As these companies get larger and larger, it just makes sense for them to do some hiring in the States.'

The Indian economy - boosted by a savings culture of large cash deposits - has boomed and is this year predicted to outpace China.

Businesses around the world have targeted India - part of the 'BRIC' emerging economies - for their global expansion.

Residents there have seen an increase in living standards and higher wages, which has led to higher spending.

In short, all that dastardly outsourcing has enriched Indian companies and workers, and now they're looking to the United States for not just new customers but also new employees.  Very cool.  The article even lists the biggest Indian companies that have outsourced work to the United States:

• Tata Consultancy Services.  Tata Consultancy Service is based in Mumbai and had a turnover of $8bn in 2011. They employ more than 200,000 worldwide with a significant number of those, believed to be around 15,000 based as outsourced jobs in the U.S.

• Aegis Communications.  Technology firm Aegis is part of the Essar group based in Mumbai with an annual revenue of $15bn. Aegis employs 9,000 in the U.S. at offices throughout the country.

• Wipro.  Based in Bangalore, IT specialists Wipro employ around 4,000 people in jobs that have been outsourced to the U.S.

• Genpact.  The IT outsourcing company employs 1,500 people in the U.S. but that is expected to triple over the next two years as bosses find it cheaper than employing Indian staff at home.

• Infosys.  The company is based in Bangalore with an annual revenue of $100m. They have 130,000 employees worldwide.

Sen. Stabenow and her colleagues claim that a massive expansion of TAA is absolutely necessary to "reflect the realities of today's global economy," so I'm sure when confronted with these indisputable facts about the global dominance of the American services sector (and its workers) - and the obvious benefits of globalization at home and abroad - these caring Senators will stop holding our pending FTAs hostage to a needless and costly TAA expansion, right?

Rrrrriiiight.

Given the fact that these TAA-loving Senators, as well as the politicians in the White House and elsewhere, desperately want to subsidize America's globally-dominant services workers with (even more) borrowed money, it seems to me that they, not those opposed to TAA expansion/extension, are the ones in dire need of a "reality check."

UPDATE: Mark Perry has more on the rapidly changing global labor market.

Monday Quick Hits

The eastern seaboard is clearly under attack from global cooling.  Here are some interesting links to get you through these dark and cold "spring" days.

• Chevy Volt: the car from Atlas Shrugged Motors.

• Sore losers implore the US to take their ball and go home.  I like to call this the "Cartman strategy."

• New 2004 UCLA study: FDR's statist policies prolonged the Great Depression by seven(!) years.

• Sarah Palin advocates import liberalization in India, further solidifying her free trade bona fides: "[I]n the early 1990′s, due to clear, commonsense, pro free-market reforms, India’s economy took off! [It] abolished import licenses; cut import duties; removed investment caps & broke the union’s grip on industry."

• The United States has the most progressive tax system in the industrialized world.  Key graf: "[T]he top 10 percent of households in the U.S. pays 45.1 percent of all income taxes (both personal income and payroll taxes combined) in the country. Italy is the only other country in which the top 10 percent of households pays more than 40 percent of the income tax burden (42.2%). Meanwhile, the average tax burden for the top decile of households in OECD countries is 31.6 percent."

• A fascinating study (and a related WSJ op-ed) from the UK think tank Policy Exchange on the impact of global trade on the effectiveness (or, more accurately, the impotence) of the EU's climate change regulations has me wondering whether our policymakers will (i) learn the right lesson from the EU's experience - and the one advocated by Policy Exchange ("to accelerate the development of technologies that will be genuinely competitive with fossil fuels" rather than "browbeat[ing] developing countries into going green") or (ii) use the study to justify their calls for eco-protectionism.  I'm hoping the former but cynically expecting the latter.

• US steelmaking giant Nucor recently broke ground on a new iron making facility in Louisiana that would employ hundreds.  The same site is also permitted for another iron facility, and many are guessing that a steel mill will also show up down there in the next few years.  Oddly, ABC News isn't doing a week's worth of news stories on the Nucor plant(s) or any of the many other industrial expansion efforts across the country.

• Why won't Sen. Sherrod Brown (D-OH) debate GMU's Don Boudreaux on the merits of free trade?  (Yes, that's a rhetorical question.  *cluck cluck*)

• Cato's Dan Griswold points out that the easiest way to decrease American income inequality appears to be destroying the US economy.  (Obvious response: Shh, dude, don't give anyone any bright ideas.)

• So much for the silly myth of "McJobs" in the service industry.  According to this handy primer from the National Retail Federation, the import-dependent retail industry in 2009 employed 330,000 managers who earned an average annual salary of $91,650.  And there are another 300,000 or so well-paid folks in other positions.  (This isn't new, but it's worth mentioning here anyway.)

• Finally, Jonah Goldberg at AEI points us to an awesome video from Hans Rosling about the amazing improvements in global wealth and health over the last few decades.  All of it is cool and worth watching, but for our purposes, the most relevant point is around the 10:00 mark when Rosling unequivocally credits the dramatic, disproportionate (relative to other African nations) improvement of Mauritius on the country's embrace of free trade.

 Enjoy!

The US Government's Horribly Misplaced China Trade Priorities

It's no secret that the US Congress and many in the Obama administration have been somewhat obsessed with US-China trade over the last few years, and considering that China is a rising economic power and one of the United States' largest trading partners, a certain amount of US government attention is arguably warranted.  However, two recent columns from the Wall Street Journal shine a really bright and depressing light on just how misplaced Congress' (and the US government's more generally) priorities have been, and continue to be, with respect to US-China trade policy.

First, the WSJ's Peter Stein explains how the recent good news that two big US investment banks have gained new access to the Chinese market is not nearly as good as it could have, or should have, been:

On Friday, Chinese regulators confirmed that J.P. Morgan Chase & Co. and Morgan Stanley have both been given the green light to set up shop in China's domestic securities market.

Like other investment banks looking to enter the China market, neither can look forward to an awful lot for now. They're both restricted to 33% ownership of a joint venture with a local partner. They can underwrite stocks and bonds, but they won't have the licenses to trade those securities in the secondary market. Even UBS AG, whose UBS Securities is the most active foreign underwriter in China, made a net profit in 2009 of only around 109.2 million yuan ($16.5 million), according to publicly available data.

Foreign banks in general have struggled to build meaningful businesses in China. But the rules that hold back investment banks from doing more China business are unusually strict. Commercial lenders, by contrast, can set up banks in China that they own entirely, avoiding the perennial risk that their relationship with a joint-venture partner sours. In the asset-management industry, foreign investors can own 49% of a joint venture, giving them a bigger slice of the profits. The Street may have only itself to blame.

Foreign investment banks just weren't that into China, or at least its domestic stock market, back when China was negotiating admission to the World Trade Organization in the years before a deal was reached in 2001, says Zili Shao, chairman and chief executive of China for J.P. Morgan. As a lawyer, Mr. Shao worked on setting up China ventures for Goldman Sachs Group Inc., UBS and CLSA Asia-Pacific Markets, a unit of the French bank Crédit Agricole SA.

At the time, China's financial sector was a mess, and its stock market was a far cry from the major force that it is today. With plenty of market opportunities elsewhere, the need to press for access to China might not have ranked as a top priority at the banks. "That was a major underestimation," says Mr. Shao.

David Strongin, managing director of the Securities Industry and Financial Markets Association, says, "We vigorously and aggressively pursued opening China's market." But rules on foreign participation in China's securities industry were among the last unresolved issues blocking China's entry into the WTO, he adds, "so all leverage to negotiate was gone." He describes the current restrictions as "a huge impediment to competing in China."...

Today, says Mr. Shao, there's no discussion taking place about changing the status quo. In Washington, he says, the goal of boosting U.S. access to China's markets has taken a back seat to political pressure for China to revalue its currency. "There is a lot of debate about the currency," he says, "but no one is arguing for greater market access."

Speaking of currency, it's one of the topics in a great new WSJ editorial which explains just how little all that American political effort on China's currency - and the US-China trade balance - could end up getting us.  In the process, the piece hits on a lot of the issues that I've been discussing over the last year or so like China currency, global supply chains, import benefits, trade diversion, the trade deficit, and, of course, really stupid congressional rhetoric:

No sooner has a new Congress arrived in Washington than the anti-China-trade rhetoric has started anew. Senator Charles Schumer, whose Democrats still control his chamber, has said he plans to re-introduce legislation to punish China for its "currency manipulation." Tim Murphy, a Pennsylvania Republican, may push similar legislation he co-sponsored in the past, Reuters reports....

Leaders face many decisions on how best to put the American economy back on a growth track. To the extent that Congressional protectionists will present Chinese exporters as a threat to American prosperity despite all the other more pressing problems America faces, the argument over China's exchange-rate policy is a distraction the economy can't afford.

How much of a distraction is suggested by a paper out last month from the Asian Development Bank Institute. Economists Yuqing Xing and Neal Detert examined the supply chain of the iPhone to reach a surprising conclusion: Technically, the iPhone contributes to America's trade deficit with China.

The basic explanation is that data on bilateral trade are calculated assuming that the entire value of a traded good is created in the exporting country. If that ever made sense, it certainly doesn't in a global economy marked by increasingly complex supply chains.

In the case of the iPhone, Messrs. Xing and Detert note that the device was invented in America by an American company, Apple. The components are manufactured, either inside or out of China, by companies based in several other countries. The only part of the entire process that is unambiguously "Chinese" is the final assembly—a process that, in the estimation of Messrs. Xing and Detert, adds only $6.50 to the $178.96 wholesale value of an iPhone.

Yet that entire $178.96 value ends up attributed to China in the calculation of trade statistics. As a consequence, the iPhone contributed nearly $1 billion to China's bilateral trade surplus with America in 2008, and nearly $2 billion in 2009, the authors of this study conclude. If the trade data had been based solely on the $6.50 cost of assembling each unit, the iPhone would have added only $34 million and $73 million in those years, respectively, to China's surplus.

The ADBI study ought to be required reading on Capitol Hill. Most importantly, it raises the question of how much anyone really knows about what America's trade with China is. Critics of trade data, including us, have long asserted that bilateral statistics are misleading at best. As the bilateral trade deficit with China grew, deficits with South Korea, Taiwan and Singapore declined, confirming that China's comparative advantage lies in the assembly into finished products of components manufactured around the region, due to its low-wage, low-skilled labor....

Crucially, the trade data also miss the broader economic impact of "imports" like the iPhone. The benefits are clear and large, though hard to quantify precisely. First there are the gains to Apple itself. The ADBI study examines only the composition of the $178.96 manufacturing cost of the iPhone. The handsets typically retail for as much as 50% to 100% more than that. The difference consists of the value of Apple's intellectual property in having invented the iPhone, and also the value of marketing in persuading consumers to buy the hot new thing.

The ADBI study doesn't break down that figure, but others have performed similar research in the past. Economists at the Personal Computing Industry Center attempted in 2007 to estimate who profits from the iPod and how. They estimated that for an iPod retailing for $299, retailer and distributor margins account for $75 and Apple's own margin accounted for $80. In other words, more than half the retail price accrued to American companies—and their employees and shareholders—in some form.

None of these studies accounts for another huge way such imports drive growth by spurring innovative new businesses. Telecom companies like AT&T and, now, Verizon have profited by being able to offer data services to iPhone-toting consumers. Countless programmers around the world are now devising applications for the iPhone and iPad, which offer many businesses a convenient new way to reach potential customers.

All of which illustrates the basic truth that trade has always benefited the American economy. Congress can't afford to forget that, no matter how much Members would like to scapegoat Chinese factories for Washington's own policy mistakes.

So rather than launching a trade war with China over $6.50, here's a better agenda for the 112th Congress: Focus on policies that will help Americans and U.S. companies better capitalize on a global economy. That includes better tax policies to reward investment and entrepreneurship; environmental regulation that does not discourage manufacturing in America when it would make business sense; health-care policies that don't deter hiring; and free trade to let Americans import goods like iPhones that will spur new growth.

Like I said, great stuff.   And when you combine the two WSJ pieces, one very important thing becomes crystal clear: the United States government is totally wasting its time on meaningless issues like the trade balance and China's currency and totally ignoring far more important (and valuable) issues like access to China's market, particularly for globally-dominant American service providers.  In short, we're so irrationally focused on a measly $6.50 that we're letting billions of dollars slip out the back door.  Ugh.

One point of contention, however: contrary to Stein's assertions' the United States government does have a huge chance to quickly improve its companies' access to China's relatively closed services market, as well as many other developing countries' goods and services markets around the world: the WTO's Doha Round of multilateral trade negotiations.  Indeed, several studies (like this one) have shown that an ambitious Doha Round agreement on services could  improve global welfare by well over a trillion - with a "T" - dollars, with much of that going to US services companies and their employees.  And, as Phil Levy and I recently noted, there is a very real and immediate opportunity to complete the Doha Round in 2011.

Of course, Levy and I also noted that the fate of the Round rests squarely on the shoulders of President Obama and the US Congress - particularly in their ability to craft a bold offer on agricultural subsidies and industrial market access and convince (or push) other WTO Members to do the same.  Such a plan, however, requires a ton of effort and even more political will, and although the US government has (perhaps) hinted that it's getting serious about Doha, it's still futzing around with silly distractions like China's currency and the bilateral trade balance.  Those in Congress, it seems, are far more worried about $6.50 than they are those untold billions.

Obama, however, need not be so distracted, and next week's meetings with Chinese President Hu Jintao provide the President with the perfect opportunity to prove that he's above the nonsensical nincompoopery of self-interested politicos like Chuck Schumer and is instead ready to lead on trade.  At the meeting, Obama can show Hu that the US is deadly serious about the Doha Round, and that China should be too.  There's no time to waste, and the stakes are just too high to focus on anything else.

Especially a Senator from New York and $6.50.